Rising Losses From Severe Convection Storms Mostly Explained by Exposure Growth

Rising Losses From Severe Convection Storms Mostly Explained by Exposure Growth
Property Risk Management

07 of 08

This insight is part 07 of 08 in this Collection.

September 11, 2023 5 mins

Rising Losses From Severe Convection Storms Mostly Explained by Exposure Growth

Rising Losses From Severe Convection Storms Mostly Explained by Exposure Growth Hero Banner

Climate change or exposure growth? By understanding the drivers of increased severe convective storm loss volatility, reinsurers can better prepare for January 1 renewals.

Key Takeaways
  1. From 1990 to 2022, severe convective storm losses increased at an annual rate of 8.9 percent.
  2. Over 80 percent of the loss trend can be explained by exposure growth.
  3. There is little evidence that climate change is impacting key atmospheric ingredients that influence SCS.

Seventy percent of global insured losses were driven by severe convective storms (SCS) in recent years. In the U.S., SCS caused $38 billion of insured loss in the first half of 2023, breaking the record of $33 billion set in the first half of 2011. From 1990 to 2022, SCS insured losses increased at an annual rate of 8.9 percent. As we enter January 1 (re)insurance renewals, it’s pertinent to understand what is driving this trend of SCS loss volatility. Is it climate change, where a warming planet contributes to a shift in weather patterns, resulting in a new normal of elevated storm activity? Or can the increased loss trend be explained by underlying exposure growth and population distribution changes? 

We answer this question by first looking at the weather “ingredients” that are most favorable for severe thunderstorm development. The first is Convective Available Potential Energy, or CAPE, which is a measure of atmospheric instability and considered as a proxy for fuel available to a developing thunderstorm. The second variable is wind shear, a measure of wind speed and directional differences with height above the Earth’s surface. The product of these two measures is known as the Severe Index (SEV) and is commonly used to diagnose severe weather potential.

Severe weather ingredients from 1990-2019

Severe weather ingredients from 1990-2019

The chart above shows annual averages for key SCS ingredients from 1990-2019. National Oceanic and Atmospheric Administration’s ERA5 reanalysis data, which is reported every six hours, was averaged through each year to determine the annual number. Other than some long term, decadal variation in CAPE observations in the Central U.S., there are no discernible trends in atmospheric ingredients that are most suitable for severe weather formation. 

With the absence of physical drivers increasing severe convective storms, we can then assume that much of the SCS loss trend is due to underlying exposure changes. To prove this, we identified four main drivers of exposure change and quantified how much of the overall SCS loss trend they explained. 

  1. Real gross domestic product (GDP) accounts for how much “stuff” there is in the economy and grew at an annual rate of 2.3 percent. 
  2. Fixed reproducible tangible wealth (FRTW) accounts for how much goods and services are worth and grew at an annual rate of 2.1 percent. 
  3. Property cost inflation, measured by the producer price index for all construction, provides a good estimate of how construction costs change over time. This grew the fastest at a 2.8 percent rate. 
  4. Population distribution, measured by the housing distribution index, is based on changes over time in housing units in high hazard states like Texas and other Sun Belt states. It grew t a rate of 1.1 percent.
Trends 1990 to 2022

Nominal annual SCS losses and loss and exposure trends from 1990 to 2022

Source: Aon Analytics

Note: Nominal losses were subject to a $100 million (in 2006 dollars) threshold before being aggregated by year.

Overall, exposures have grown at a combined rate of 8.6 percent per year. Compared to the loss trend of 8.9 percent, and allowing for analysis uncertainty, this means that over 80 percent of SCS loss growth can be explained by exposure changes. The remaining 20 percent is unexplained by these metrics but could be due to small climate changes that are not discernible in the Severe Index, other exposure factors, or random chance. 

While climate change has been shown to be a driving force behind evolving trends for other perils such as hurricane and heatwave, there is little evidence that climate change is impacting key variables that influence SCS. (Re)insurers instead must deal with growing exposures in high hazard areas, which can be managed through traditional risk management techniques, such as accumulation management, effective claims handling and appropriate deductible, limit and premium levels. Going forward, the industry’s emphasis for the SCS peril should be less on a changing climate and more on traditional risk management.

 

General Disclaimer

The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Terms of Use

The contents herein may not be reproduced, reused, reprinted or redistributed without the expressed written consent of Aon, unless otherwise authorized by Aon. To use information contained herein, please write to our team.

Aon's Better Being Podcast

Our Better Being podcast series, hosted by Aon Chief Wellbeing Officer Rachel Fellowes, explores wellbeing strategies and resilience. This season we cover human sustainability, kindness in the workplace, how to measure wellbeing, managing grief and more.

Aon Insights Series UK

Expert Views on Today's Risk Capital and Human Capital Issues

Construction and Infrastructure

The construction industry is under pressure from interconnected risks and notable macroeconomic developments. Learn how your organization can benefit from construction insurance and risk management.

Cyber Labs

Stay in the loop on today's most pressing cyber security matters.

Cyber Resilience

Our Cyber Resilience collection gives you access to Aon’s latest insights on the evolving landscape of cyber threats and risk mitigation measures. Reach out to our experts to discuss how to make the right decisions to strengthen your organization’s cyber resilience.

Employee Wellbeing

Our Employee Wellbeing collection gives you access to the latest insights from Aon's human capital team. You can also reach out to the team at any time for assistance with your employee wellbeing needs.

Environmental, Social and Governance Insights

Explore Aon's latest environmental social and governance (ESG) insights.

Q4 2023 Global Insurance Market Insights

Our Global Insurance Market Insights highlight insurance market trends across pricing, capacity, underwriting, limits, deductibles and coverages.

Regional Results

How do the top risks on business leaders’ minds differ by region and how can these risks be mitigated? Explore the regional results to learn more.

Human Capital Analytics

Our Human Capital Analytics collection gives you access to the latest insights from Aon's human capital team. Contact us to learn how Aon’s analytics capabilities helps organizations make better workforce decisions.

Insights for HR

Explore our hand-picked insights for human resources professionals.

Workforce

Our Workforce Collection provides access to the latest insights from Aon’s Human Capital team on topics ranging from health and benefits, retirement and talent practices. You can reach out to our team at any time to learn how we can help address emerging workforce challenges.

Mergers and Acquisitions

Our Mergers and Acquisitions (M&A) collection gives you access to the latest insights from Aon's thought leaders to help dealmakers make better decisions. Explore our latest insights and reach out to the team at any time for assistance with transaction challenges and opportunities.

Navigating Volatility

How do businesses navigate their way through new forms of volatility and make decisions that protect and grow their organizations?

Parametric Insurance

Our Parametric Insurance Collection provides ways your organization can benefit from this simple, straightforward and fast-paying risk transfer solution. Reach out to learn how we can help you make better decisions to manage your catastrophe exposures and near-term volatility.

Pay Transparency and Equity

Our Pay Transparency and Equity collection gives you access to the latest insights from Aon's human capital team on topics ranging from pay equity to diversity, equity and inclusion. Contact us to learn how we can help your organization address these issues.

Property Risk Management

Forecasters are predicting an extremely active 2024 Atlantic hurricane season. Take measures to build resilience to mitigate risk for hurricane-prone properties.

Technology

Our Technology Collection provides access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities of technology. Reach out to the team to learn how we can help you use technology to make better decisions for the future.

Top 10 Global Risks

Trade, technology, weather and workforce stability are the central forces in today’s risk landscape.

Trade

Our Trade Collection gives you access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities for international business. Reach out to our team to understand how to make better decisions around macro trends and why they matter to businesses.

Weather

With a changing climate, organizations in all sectors will need to protect their people and physical assets, reduce their carbon footprint, and invest in new solutions to thrive. Our Weather Collection provides you with critical insights to be prepared.

Workforce Resilience

Our Workforce Resilience collection gives you access to the latest insights from Aon's Human Capital team. You can reach out to the team at any time for questions about how we can assess gaps and help build a more resilience workforce.

More Like This

View All
View All
Subscribe CTA Banner